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You’re going to need a bigger boat
Jennifer Namazi, CEP NASPP
Ben Needham, CEP MindBody
Joe Purdy, CEP Solium
John Hammond, CEP bendystraw llc
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GPS Stock Options Project Overview
NASPP survey data
Administrative Models and Technology
Grant Process
Exercise Process
Q&A /Wrap-up
Agenda
2
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GPS Stock Options Project Overview
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The Nonqualified Stock Option GPS was originally published in 2007
Sponsors: Bank of America Merrill Lynch, bendystraw, Charles Schwab,
E*TRADE, Fidelity Stock Plan Services, Morgan Stanley, Solium, and
UBS.
Purpose
– “…designed as an administrative-focused document that makes the
bridge between compliance and controls easier to navigate.”
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Scope
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Limited to grants of at-the-money (exercise price is equal to fair market value (FMV) of
the underlying stock as defined by the Plan on the date of grant), non-qualified (NSO)
and incentive (ISO) stock options made to US employees of US-domiciled, publicly-
traded companies with time-based vesting.
Administrative Model Assumptions: Hosted software platform (SaaS) and partial
or full outsourcing
Exclusions: non-employees, IRC 409A, international and mobile employees, private
companies
Started with the original document and added/updated
So you may be thinking “so you’ve created a paper document to talk about something
we stopped granting 5 years ago and you’d be right, but…”
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Flashback to….2004
99% of NASPP survey respondents reported having a
stock option plan
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Fast Forward to 2013-2016...
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0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Stock Options/SARs Stock Awards/Grants Performance Shares/Units
Prevalence of Equity Vehicles* (*NASPP/Deloitte 2013 Stock Plan Design Survey)
General Industry High Technology
Prevalence of Stock Options Compared to Other Equity Vehicles
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20%
91%
5% 2% 0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
ISO NQSO Stock SAR Cash SAR Stock/Cash SAR
Currently Receive
Stock Options – Current Participants
69% of the survey respondents maintain a stock option plan;
below are the following types of stock options/SARs disclosed by
individuals that currently receive stock option awards:
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CEOs, CFOs and
Other NEOs
Senior
Management
Middle
Management
Other Exempt Non-Exempt
ISOs
20% 19% 16% 18% 28%
NQSOs
91% 91% 87% 83% 75%
SAR Payable in Stock
Only 5% 5% 4% 4% 3%
SAR Payable in Cash
Only 2% 4% 6% 7% 3%
SAR Payable in Cash
and/or Stock 0% 1% 2% 1% 0%
Stock Options – Type by Employee Level
NQSOs are the most commonly granted type of option/SAR. Of the companies that
currently grant options/SARs to the employee levels indicated, the table below
summarizes the type of option/SAR granted at that employee level.
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Trends After the Initial Stock Option Grant
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Section 4 – Administrative Models and Technology
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Service models offered – outsourcing and partial administration
Will examine sample controls from the document and review in admin
environment
ILLUSTRATIVE CONTROLS ILLUSTRATIVE TEST OF CONTROLS YOUR PROVIDER HELPS THIS…
1. Confirm upgrade schedules, agenda,
and scope of upgrades are
communicated within the Company.
Confirm Provider’s process for
notification/handling of off-cycle,
minor enhancements and bug fix releases that may be deployed.
• Locate published schedule of the equity
compensation provider’s system upgrades
including past and future upgrades,
enhancements, and bug fixes. Review
policies and procedures to confirm future
upgrades don’t significantly change internal controls and procedures.
ILLUSTRATIVE CONTROLS ILLUSTRATIVE TEST OF CONTROLS YOUR PROVIDER HELPS THIS…
6. Develop a process to incorporate
new plans, or new plan
interpretations, into the system
functionality.
• Test subsequent transactions to ensure that
the system is properly handling new plans, or
new plan interpretations.
Exhibit 4-2
Exhibit 4-5
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Section 5 – Grant Process
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Few significant changes from original document, other than the
assumption of technology
ILLUSTRATIVE CONTROLS ILLUSTRATIVE TEST OF CONTROLS YOUR PROVIDER HELPS THIS…
1. Update participant data in the
platform from the human resource
system regularly, preferably in an
automated fashion, and
immediately prior to granting
options.
• Sample participant data in the stock plan
platform and reconcile the information to
HRIS.
ILLUSTRATIVE CONTROLS ILLUSTRATIVE TEST OF CONTROLS YOUR PROVIDER HELPS THIS…
1. Establish procedures to notify the
Participants of grants on a timely
basis.
• Test notification process to ensure that the
process is followed and conforms to FASB
requirement for timely notification.
Exhibit 5-4
Exhibit 5-8
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Section 6 – Exercise Process
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Few significant changes from original document, other than the
assumption of technology
ILLUSTRATIVE CONTROLS ILLUSTRATIVE TEST OF CONTROLS YOUR PROVIDER HELPS THIS…
2. Block all participants subject to
restrictions on the exercise of the
option. Require blocked participants
to receive special clearance and
handling before exercising any
option. On a periodic basis, verify
that the accounts of appropriate
participants have been blocked.
• Sample Insiders, Section 16 executive
officers, and other participants with legal
restrictions to ensure the grants to all
appropriate individuals have been blocked
to prohibit the exercise of their options.
• Sample exercises that required pre-
clearance (such as key executives). Verify
proper pre-clearance authorization was
received according to the policy prior to the execution of the exercise.
ILLUSTRATIVE CONTROLS ILLUSTRATIVE TEST OF CONTROLS YOUR PROVIDER HELPS THIS…
4. On a monthly basis, reconcile the
transfer of shares between the
Transfer Agent and the Broker by
plan. Investigate and resolve any discrepancies.
• Review the monthly reconciliation and note
any items investigated and the resolution of the item.
Exhibit 6-3
Exhibit 6-4
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Section 7 – Tax and Payroll Issues
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Changes: ISOs and the assumption of technology
ILLUSTRATIVE CONTROLS ILLUSTRATIVE TEST OF CONTROLS YOUR PROVIDER HELPS THIS…
1. Establish and document the
process to transfer data from the
stock plan platform into the payroll system.
• Sample option exercises from the stock plan
platform for several days and verify that the
exercise was reported in the payroll system
on a timely basis and to the correct employee.
4. On a monthly basis, verify that the
taxes withheld amount shown in the
stock plan platform agrees to the
payroll records. Investigate and resolve any discrepancies.
• Verify that the reconciliation was completed. Note trends and unusual problems.
Exhibit 7-11
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Questions?
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Speaker Contact Information
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Ben Needham, CEP
(805) 465-7971
John Hammond, CEP
(856) 267-0870
Jennifer Namazi, CEP
(301) 685-3475
Joe Purdy, CEP
(203) 447-5843
